Investors who bought stocks in early 2010 are in the red and many may be tempted to switch into cash - despite the risk that some central banks will renew efforts to make money more plentiful and therefore cheaper. Looking beyond Friday's evidence of startlingly strong German economic growth in the second quarter, many think the global economic recovery is already losing momentum.
The US labour and housing markets remain sluggish, while slowing growth in China's investment and factory output and weaker retail sales portray softening domestic demand there. Over the past week the Federal Reserve has decided to buy more government debt with the cash from maturing mortgage bonds it holds, possibly heralding the start of more aggressive monetary easing. The Bank of England also left the door open for more easing after it cut its forecast for UK economic growth.
Monetary easing in theory should encourage investors to buy risky and higher-yielding assets as the return on cash diminishes. But with a threat of a return to recession, cash preservation might be more of a priority for some investors.
Backing up this point, fund tracker EPFR's data shows investors poured another $5.1 billion in the latest week into money market funds, which posted their first three week run of inflows since the first quarter of 2009.
"Quantitative easing is likely to bring diminishing and ultimately negative returns," noted Max King, multi-asset portfolio manager at Investec Asset Management.
"The signal from markets that the global economy is at risk of a renewed downturn, perhaps caused by policy mistakes, could be right. Investors should not rush to liquidate investments but should consider keeping a sizeable cash reserve for the opportunities the continuing financial crisis is likely to throw up."
Separate data from the industry's Money Fund Report shows US money market fund assets rose by $10.3 billion to $2.8 trillion in the latest week. Various speeches from Fed officials and the minutes of the Bank of England's August monetary policy meeting, due in the coming week, should give more clues about the possibility of further easing on both sides of the Atlantic.
The renewed rush to money market funds - unloved asset classes during the risk rally in 2009 - reflects disappointment over stock market returns.
World stocks, measured by MSCI, are down more than 4 percent this year, having risen 31 percent in 2009. Even emerging market stocks are slightly down from the beginning of this year.
"The continued commitment to stimulus should be good for risk assets. But the market is focused very heavily on the prospects of a double dip and on weaker demand," said Mark Konyn, Asia-Pacific chief executive of RCM.
"Meanwhile, cash is still building up with several institutions and there is a reluctance to allocate that cash."
Swiss-based wealth manager Sarasin is overweight on money markets, and has just reduced its commodities weighting to neutral from overweight.
"The expected slowdown in growth harbours significant risks, which is why we remain tactically neutral," Philipp Bartschi, chief strategist at Sarasin, said in a note clients.
"We do not see any more potential for bonds at this level. We therefore remain underweight and have parked the proceeds from the sale of commodity assets in the money market." As for cash, US fixed income manager PIMCO believes investing just beyond the money market spectrum - in 15- or 18-month maturities rather than 13-month, for example - is attractive especially as new, more restrictive US regulation is set to compress money market yields.
The new Rule 2a-7 means money market funds must restrict their underlying holdings to investments that have more conservative maturities and credit ratings than before. They also need to maintain more liquidity.
The changes were spurred by a key US manager, Reserve Primary Fund, "breaking the buck" when its net asset value per share fell below $1 at the height of the financial crisis in 2008.
"We strongly believe that the new 2a-7 regulatory changes will have a dampening effect on money market yields and that the demand for true liquidity will be very costly in terms of yield performance," PIMCO said in a note to clients.
However, it added, the changes also increase opportunities for investors who don't need immediate liquidity to seek higher returns just outside the rule's boundary.